While we have talked at length about the transformative power of Industry 4.0, we would be amiss not to also acknowledge that it also faces many, and serious challenges, both in terms of perception and adoption, and in terms of technological implementation.

First, the sheer nature and magnitude of the change poses a challenge. Building a complex value network that produces and distributes goods in a flexible fashion means companies must accept to change and partner with other companies – not only suppliers and distributors, but technology companies and infrastructure suppliers such as telecoms and internet providers. Even cooperation with competitors might be required, for example in order to establish standards that enable the transmission and exploitation of large quantities of data. The major disruption in the value chain will require players to rethink their way of doing business and their role in the market in order to adapt to Industry 4.0. Different business models, ones that based around intellectual property and data, or utilizing pay-by-usage or platform/ecosystem models, are emerging. These new business models are causing a shift away from physical product revenues towards more service-based revenues, platforms, and developer ecosystems. The result will be a shift in sources of profit along the value chain (value pools) for both manufacturers and suppliers. This shift is fundamental, and will require a lot of rethinking and adaptation. While in the manufacturing industry actual product sales have traditionally been the largest value pool in terms of the proportion of overall expenditure, this share is likely to decline in the future. How we think about value in manufacturing needs to, and will, change.

The need for a substantial investment in Industry 4.0, especially IIoT, technologies also poses a substantial challenge to businesses. According to a 2015 EU Briefing called “Industry 4.0: Digitalisation for productivity and growth”, the investments needed by enterprises are projected to be €40 billion annually until 2020 for Germany, and perhaps as much as €140 billion annually in Europe. Those investments can be particularly daunting to small-and-medium enterprises, which have less of a financial “cushion” and are more cautious of the effects the transformation will have on their value chain. Some critics even think Industry 4.0 solutions are too expensive to be worth it. However, according to a recent McKinsey report , a major reason why industry players should invest in Industry 4.0 is that traditional productivity levers have been mostly exhausted. In the 1970s and 1980s, lean adoption was en vogue, with Toyota’s system becoming widely adopted. Outsourcing and offshoring allowed greater profitability in the 1990s by moving low-skill manufacturing to low-cost countries. But in the 2000s, the advantages of offshoring began to shrink as wages in traditionally low-income countries rose and freight costs increased. The technologies of Industry 4.0, such as IT-enabled manufacturing and increased computing capacity, hold the promise of smart factories that are highly efficient and increasingly data integrated, thus offering a new productivity lever to press.

And the last, but definitely not least, challenge we want to cover in this post, is IT security. In an increasingly digitalized business, the importance of developing more secure and robust networks that can nevertheless be interconnected, simply cannot be overstated. Especially if connection to the internet is required, that opens the business to potential attacks from anywhere. The danger of such attacks, and the potential for their use for industrial sabotage or plain data-theft, have been amply demonstrated in the past – from Stuxnet to the countless data breaches and hacks in the recent years that have compromised company and customers’ security . There are measures to be taken regarding how the security of the information exchanged in the factories will be managed. The infrastructure should be carefully designed to support the full availability of interconnectivity, and even internet connectivity, without compromising the data, or the internal security. Endpoint protection, authentication methods and encryption will probably become major topics in Industry 4.0.

In the next post we will cover some further challenges facing Industry 4.0. We will then quickly discuss how algorithmica technologies and our solutions fit into the Industry 4.0 landscape before concluding our exploration of Industry 4.0.